Friday, June 29, 2012

While I am mildly opposed to Obamacare based primarily on my opinion that it will end up costing far more than currently envisaged, I thought that the law was constitutional. Without question, Congress has the power to tax. Article I, Section 8 of the U.S. Constitution provides in unambiguous terms, except to reactionary True Believers like Sen. Rand Paul, that "The congress shall have Power to lay and collect Taxes". The U.S. Constitution Online

The majority categorized correctly the fine associated with a refusal to buy health insurance as a tax. Politicians do not want to use the "tax" label.

Initially, both CNN and Fox reported incorrectly that the Court had struck down the individual mandate as unconstitutional, NYT, proving once again that the "news" can travel around the world before the truth has an opportunity to put on its shoes.

A majority also held that the Commerce Clause did not authorize the individual mandate. This part of the majority decision was in effect a reversal of 75 years of precedent, as noted by the conservative constitutional law professor Charles Fried. NYT That part of the decision was also 5-4, with Roberts this time joining Scalia, Thomas, Kennedy and Alito in the majority. Ginsburg, Breyer, Sotomayor and Kagan dissented from that part of the opinion which, in their view, was "a stunning step back that should not have staying power".

I believed that the Court would invalidate the individual mandate provision in a 5 to 4 decision, with the 5 GOP nominees banding together to make an ideological and political decision acceptable to their party members. Most observers believed that the only possible swing vote would be Justice Kennedy (Bloomberg).

As it turned out, the swing vote was surprisingly Chief Justice Roberts, appointed by Bush Junior, who wrote the majority opinion. (copy of decision: Supreme Court Decision on Health Care) As is now apparent, Roberts was less inclined than the 4 dissenters to overturn a law passed by the democratically elected members of Congress and signed by the President into law, and certainly more willing to strictly construe the unambiguous meaning of the Constitution.

Scalia, Alito and Thomas are "strict constructionists" only in a limited sense. Without question, they would become strict constructionists or "originalists" when deciding a case involving abortions or some other law that draws their collective ideological ire. And they would like to gradually eviscerate the scope of Congresses power under the Commerce Clause, for the purpose of rolling back progressive legislation.

In an abortion case, the so-called "conservative" Justices would show disgust and disdain about the "right to privacy" created by the liberal justices in Griswold v. Connecticut and later applied in the abortion context in Roe v. Wade.

A true Judicial conservative would have dissented in Griswold and would have joined the majority in yesterday's decision, at least in that part dealing with the Constitution's enumerated taxing power reserved to Congress. For Obamacare, those dissenters were inclined to take a pair of scissors and cut out the part of the Constitution viewed as inconsistent with their reactionary ideology. And, for true Judicial conservatives, eliminating Constitutional provisions to suit an ideology is no more acceptable than creating provisions that are not in the Constitution.

When I was in my 20s, 30s and 40s, I elected to invest the money that otherwise would have gone to paying health insurance premiums. I was in excellent health and took a chance. It worked out for the best.

I would have been mildly irked during that period by a government edict that would fine me for that personal decision. I would have accepted it, however, based on a number of factors, including the preeminent one. It was necessary to have healthy young people paying premiums if insurance companies were going to be required to insure anyone regardless of a pre-existing condition. Otherwise, a person could simply wait until they needed the insurance before buying it, and that would cause premiums to skyrocket for those participating in the plan.

{I have never been employed by an organization that pays for health insurance. I took out a health insurance for myself only a few years ago. I now pay almost $400 a month for a comprehensive medical policy with a $5,000 deductible. I have made contributions to a Health Savings Account (a GOP version of a healthcare plan for use by the well to do), which were deductible, though I have not had a reason to use those funds to pay a medical bill I have never been hospitalized, have not even had a cold in a decade, and have no medical issues. My premium rose 23.5% last December. Based on prior experience, a 10% increase would cause me to rejoice.}

According to the latest Reuters poll, 61% of Americans oppose the individual mandate but 82% support the provision on coverage for pre-existing conditions. Opinions do not have to make any sense, particularly those that involve having your cake and eating it too. Those kind of contradictions are part of the culture, a desire to receive a benefit without paying for it which gradually becomes a right to receive something for nothing. The same poll found solid majorities favoring other provisions in Obamacare. Largely through skilled misrepresentations about the law, Republicans have won the media battle, as most independents oppose the law while favoring its individual provisions when asked about each one. The President has done a dismal job selling this program to those Americans who are at least open to hearing his arguments.

Hospital stocks rose in response to the ruling. If most people have health insurance, one of their major expenses-bad debts- would become far less important than now. Part of that major benefit would be offset by lower Medicare reimbursement rates. HCA Holdings rose 10.8% in trading yesterday. I own two senior HCA bonds, and have no position in the common. I do own 50 shares of Health Management Associates as a LT and that hospital operator rose 9.01% yesterday. Another mild beneficiary of the Supreme Court's ruling was hospital REITs. I own 100 shares of Medical Properties Trust in the Roth IRA, which rose 3.63% yesterday to close at $9.41.

The NYT reported yesterday that J P Morgan may incur up to $9 billion in losses from the London whale trade. (I have a strong distaste for the phrase "up to". That could mean anything from $1 to $9 billion.) The WSJ now pegs the loss at $5 billion, which could go higher or lower. Reuters is using a $4 to $6 billion range. Whatever, that is more than the original estimate of $2 billion and is by any measure a disastrous trade.

Yes, of course, the Masters of Disaster know what they are doing and need to be free from any governmental restraint according to the GOP. Why you may ask, so that they can work their Nerd magic formulated by "risk models" that are frequently divorced from reality. One of their best magic tricks is cause billions of dollars to vaporize. When those billions are incinerated, the risks inherent in their carelessness and greed can then become socialized in order to avoid financial Armageddon, at least when their mistakes endanger too many large financial institutions. The result is that those who had no responsibility for, and received no benefits from the frequently idiotic schemes are required to pay for the clean up in a variety of ways. Freedom from Regulations and Irresponsibility (March 2009 Post)

I am currently reinvesting the quarterly dividends paid by RVT and RMT, two closed end stock funds that invest in small and micro caps respectively. Earlier this week, I received the shares purchased with their last dividends:

Both of these CEFs are selling at close to a 10% discount to their respective net asset values. For me, that is borderline discount for the reinvestment of a stock CEF's dividend. I will likely cease reinvesting those dividends once the discount to net asset value falls below 10% on a consistent basis.

The debt of European countries as a percentage of GDP can be found in this interactive map at Reuters.com.

FYI, Powershares has a low volatility ETF, S&P 500 Low Volatility Portfolio (SPLV). This fund will select 100 stocks out of the S & P 500 "with the lowest realized volatility over the past 12 months". Before I looked at the holdings, I knew that the fund would be heavily weighted in utilities, consumer stables and health care stocks.

After the close yesterday, NIKE missed the consensus estimate by 20 cents for its fiscal 2012 4th quarter. I have no position.

My main taxable account actually increased in value yesterday.

1. Bought 1 U.S. Steel 7.5% Senior Bond Maturing on 3/15/22 at 94 Last Tuesday(Junk Bond Ladder Basket Strategy)(see Disclaimer): This is a new bond from U.S. Steel, issued last March. So, I was able to buy it cheaper than the original purchasers.

According to FINRA, this bond is currently rated B1 by Moody's and BB by S & P.

The next call date is 3/15/17 at 103.75% (page S-11, which premium declines thereafter until 2020 when the bond may be called at 100% (page S-10) The bond may be called prior to that time subject to a make whole provision.

For the first quarter of 2012, U.S. Steel reported a net loss of $1.52 per share on revenues of $4.833 billion. Form 10-Q On an adjusted basis, net income was reported at $110 million or $.67 per share. The GAAP number included a $399M loss from the sale of U.S. Steel Serbia and two extraordinary gains of $58M and $12M after tax.

As of 3/31/12, the company had $3.802 billion in long term debt and $652 million in cash and cash equivalents. The foregoing debt number includes a 2013 senior 5.65% note, with $300 million in principal amount outstanding as of 3/31/12, that was redeemed with the proceeds of the 2022 note in April, so the overall amount of debt is now less. As noted above, the 2022 is included in the $3.802 billion debt number as of 3/31/12.

The maturity schedule for that debt can be found at note 12, page 14. The size and maturity schedule of that debt is potentially worrisome, so I limited myself to just a one bond buy.

The current consensus earnings forecast is for an E.P.S. of $1.69 in 2012 and $3.34 in 2013. X Analyst Estimates I would not place faith in earnings estimates for such a highly cyclical company unless those analysts have been blessed with some kind of divine foresight about worldwide economic conditions in the coming months and years.

The company is currently paying a five cent per share quarterly stock dividend.

My confirmation states that the current yield at my cost is 7.911% and the YTM is 8.297%:

U.S. Steel 2022 Bond Confirmation

This broker includes the commission cost in the price. Whenever I mention the price paid for a security, I will exclude the commission. When calculating profits, I will include both the buy and sell commissions. Vanguard will have the bond brokerage commission as a separate item.

2. General Mills (own:Common Stock Dividend Growth Strategy):General Mills reported on Wednesday its 2012 fiscal 4th quarter results. GIS reported diluted GAAP E.P.S. of $.49 on a 12% increased in revenues to $4.1 billion, with the international Yoplait acquisition contributing nine points of net sales growth. That acquisition was completed in July 2011. The adjusted E.P.S. was $.6, up 15% from the $.52 earning in the year ago quarter. The consensus forecast was for $.59 on $4.11 billion in revenues. Reuters

For the F/Y 2013, GIS expects net sales growth in the mid single digits. Operating profits are expected to increase slightly faster than sales. Increased pension expenses and a higher tax rate are expected to reduce E.P.S. by 8 cents per share, while share repurchases will add to E.P.S. Overall, the company currently estimates F/Y 2013 E.P.S. at $2.65, lower than the current consensus forecast of $2.75.

General Mills also announced earlier this week a 8% increase in its quarterly dividend 33 cents per share. I am reinvesting the dividend.

I have traded GIS and currently own shares bought at $35.53. Although I have not bought anymore shares in the market, I intend to do so at some point, but I am not in any hurry to do so. The long term chart provides a measure of comfort to the OG: GIS Interactive Chart

Thursday, June 28, 2012

I am starting to wonder whether telling the truth is a conservative value. The media and most Americans call the GOP a conservative party, which is the source of my confusion. If the GOP is the party for true conservatives, then their politicians would be truth tellers, or so it would seem.

The National Republican Committee has released a 90 second video that claims that the federal health care law taxes "heart attacks, sick puppies and even new babies". FactCheck.org found the video divorced from reality and misleading, which is standard operating procedure for the "conservative" NRCC.

MFA Financial (own) announced a quarterly dividend of $.23. MFA is a mortgage REIT. The prior quarterly dividend was 24 cents. MFA rose 9 cents in trading yesterday to close at $7.86.

Several securities that I own were ex distribution yesterday including KTN, KRBPRD, MKZ, MSPRA, WIN, NLY, PFK, and SHOPRA. The TC KTN has a penny rate of $1.0256 per share, paid semi-annually. Adjusted for the distribution, KTN shares rose 74 cents to close at $29.19 yesterday. I would not buy KTN anywhere near its current level. (KTN par value= $25) My average cost is below $14. PFK is a CPI floater issued by Prudential, maturing in April 2018, that makes monthly interest payments. Floaters: Links in One Post My average cost is below $20 on PFK, and I would not buy it at its current price (par value $25). MKZ was discussed earlier this week. Item # 1 MKZ Ends Annual Period-Paying 3% Minimum Coupon MKZ will soon pay $.30 per share. KRBPRD is scheduled for redemption on 7/25/12, Item # 3 Bank Of America Calls for Redemption All of its TPs That I Own.

1. Bought 50 JBK at $21.75 last Monday-Roth IRA(see Disclaimer): JBK started out as a synthetic floater and became a fixed coupon Trust Certificate (TC) after Lehman filed for bankruptcy. Its convoluted history has probably caused many to stay away. As a consequence, this security will yield about one percent more than other trust certificates that contain the same underlying security.

When I first bought JBK, it was being priced even more inefficiently than now, as if it was still a Synthetic Floater paying the greater of 3.5% or .75% over the 3month LIBOR rate. Prospectus

Some readers of this post have taken the time to understand the exchange traded synthetic floaters. The underlying security in JBK is a 6.345% fixed coupon trust preferred issued by Goldman Sachs Capital I maturing in 2034. That security pays semi-annually on 2/15 and 8/15. JBK was paying 3.5%, a rate higher than .75% over the 3 month LIBOR, until Lehman declared bankruptcy.

Lehman was the swap counterparty for JBK. Once Lehman declared bankruptcy, the Trustee for JBK took the position that the bankruptcy filing terminated the swap agreement. I viewed that to be the correct position. As a result, the trustee would no longer swap with the Lehman estate in bankruptcy the interest payments made by Goldman Sachs to the Trust in exchange for a payment by Lehman of the amount owed under the swap agreement, which had been 3.5%.

In short, the owners of JBK had just received a coupon raise due Lehman's bankruptcy from 3.5% to 6.345%, but it took awhile for the "efficient" market to figure it out. The payment schedule changed from quarterly, the schedule under the swap agreement, to semi-annually, which was the period of payment under the TP. Clear?

I have previously noted that the trustee was to going to make a semi-annual interest payment of $.793125, the exact penny amount due for a payment at 6.345% on a $25 par value. I also referenced SEC filings whereby Lehman acknowledged that the swap agreement had been terminated. New Information about JBK; More on JBK.

During an Unstable Vix Pattern in a long term secular bear market, I will sell securities for no other purpose than to raise cash that will hopefully be invested when the VIX moves to the high 20s and the market declines.

At the present time, I will not use my cash allocation to buy common stocks, other than REITs and BDCs. I need more comfort about the near term future to commit more cash to common stocks. I am bullish on stocks long term compared to other major asset classes

It is possible that the world will muddle through the current crises which are self-inflicted and arise from the innate human desire to receive something for nothing, to live beyond their means, to focus on today's needs rather than the future, and to act generally in an irresponsible manner when it comes to finances. Recognizing that possibility, I still own a lot of stocks.

3. Quicksilver Resources (own two 2019senior bonds and the common stock as a Lottery Ticket): S & P cut its rating on KWK's senior unsecured debt to CCC+ from B-, with a negative outlook. The reasons given by S & P are not surprising, given KWK's reliance on natural gas and its heavy debt load. TEXT-S&P

I did notice that the stock was the leading gainer on the NYSE yesterday, rising 16.32% in value to close at $5.06. The volume was heavier than normal at over 6.7 million shares. I did not see any news other than the S & P debt downgrade.

Wednesday, June 27, 2012

There is a great deal of hand wringing among economists, journalists and assorted pundits about the upcoming fiscal cliff. This would include a recent warning from the CBO that falling off that cliff could lead to a U.S. recession, ABC News This cliff refers to the looming expiration of the Bush tax cuts and automatic spending cuts. The CBO estimates that the simultaneous removal of the tax and spending stimulus will cause the economy to shrink 1.3% in the 2013 first half before expanding 2.3% in the second half. CBO | Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013

Maybe it would be for the best to go ahead and jump. Something needs to be done now about budget deficits running at over a trillion a year. As noted in a Reuters article about the austerity measures implemented by the Baltic countries in 2009, it is better to "just do it" and move on. It may take a few months to adjust, and the rich will complain about the restoration of tax rates in effect during the Clinton administration. Many of them complain about paying any taxes. The end to the current uncertainty will allow people to adapt. And, the U.S. will have at least taken the first baby step in addressing its own looming fiscal crisis. So, from where I sit, bring it on.

After the close on Monday, Moody's downgraded its ratings of 28 Spanish banks by one to four notches. Moody's downgrades Spanish banks Banco Santander is rated one notch higher than Spain's Baa3 rating, due to its geographic diversification of its balance sheet and income sources.

Nonetheless, Santander's senior debt was downgraded from A3 to Baa2. Santander's subordinated debt was downgraded to Baa3, just one notch above junk. The equity preferred stock, issued by Santander Finance, appears to me to be rated at Ba3 down from Ba1. I own 130 shares of equity preferred floating rate preferred SANPRB, which holds some limited appeal to me at its current price. Santander Finance Preferred S.A. Unipersonal Floating Rate Gtd. Pfd. Series 6, SAN.PB. I have already booked profits on that security with my current position near break-even. (snapshots at Advantages and Disadvantages of Equity Preferred Floating Rate Securities) The symbol for that security recently changed from STDPRB. When I first bought this security, it was rated in investment grade territory and now it is moving deeper into the junk category.

Spain sold yesterday €3.08 billion in three month bills at a 2.362% yield, up from the .846% yield in the previous auction.

For a change, the Case Shiller index of home prices rose in April, with home prices in 19 out of 20 metropolitan areas rising.

The market has a small rally yesterday that faded into the close. The VIX fell 2.8% to close at 19.81.

1. Bought 100 BDN at $11.238 Last Friday-Roth IRA (see Disclaimer): BDN was down about 9 cents from the prior close last Thursday, when the DJIA declined 250+ points. BDN declined 36 cents, or 3%, last Thursday, closing at $11.33 on 6/21/12. BDN Historical Prices I would prefer to see a REIT stock suffer significantly less during a big stock market down day.

An investor can view this REIT's properties by going to its website, Our Properties: Brandywine Realty Trust. Under the heading "property search", click the sate and view the properties. The REIT has a number of office properties in the Metro D.C. including southern Maryland and Northern Virginia; Richmond, VA; Philadelphia and its suburbs; and in NJ.

Morningstar has the stock rated currently at 3 stars, with a $12 fair value estimate and a consider to buy target at $7.2 which I view as unrealistic. I would view the Morningstar report to be too negative, though Brandywine's market may still favor tenants in lease negotiations.

I would not view the operating history between 2008-2010 to be a harbinger for the future, nor would I continue the conditions of that negative period deep into the future.

Prior to the near Depression, BDN had an occupancy rate of 93.5%. That rate fell to 85% at the end of 2010. When occupancy rates fall, that fact is noticed by existing tenants whose leases are expiring, and the company would suffer a deterioration in net operating income from that double whammy (lower occupancy and lease concessions on renewal).

As of 3/31/12, the occupancy rate was at 86.7%, page 44 BDN 03.31.2012 10-Q. However, with leases signed after 3/31/12, the occupancy rate was 88.8% leased.

For the 2012 first quarter, BDN reported FFO of $.32 per share, down 1 cents from the year earlier quarter. SEC Filed Press Release The company guided FFO for the year to a range of $1.3 to $1.35. As of 3/31/12, BDN had assets of $3.98 billion; cash and cash equivalents of $284.236M; held to maturity securities of $50.164M; mortgage debt of $508.21M; and unsecured senior loans of $600M. (page 6: Balance sheet numbers)

Subsequent to my purchase, Brandywine Realty announced that its joint venture acquired three office buildings in Silver Spring, Maryland, with 499,395 square feet, near a recently renovated transit station. And, Brandywine Realty announced yesterday that it had sold a two-building in Carlsbad, CA. for $29 million, or $239 per square foot, that was 84% leased.

Earlier this year, BDN sold a fully leased office building in Herndon, Va. for $91.1 million.

Brandywine Realty closed at $11.2 in trading yesterday, up 6 cents per share. The next ex dividend date is 7/2.

The goal for this kind of security is a 10% total return within a one to two year time period. Over one half of that return can be provided by the dividend. The stock needs to appreciate 4.61% on an annualized basis, after brokerage commissions, to achieve that goal. A ten percent gain in the shares within the next two years would require a price 16 cents in excess of $12.37. The stock did trade at over $12.75 in May 2011. Last summer was a bad time for the stock and the market in general. BDN Interactive Chart

2. Bought 50 AVK at $15.3-ROTH IRA Last Friday(see Disclaimer): AVK is a closed end fund that owns convertible securities. Last Friday, the fund closed with a net asset value per share of $16.5, creating a discount to net asset value of -7.27% at that time.

Convertible bonds are hybrid securities, in that they combine potential characteristics of both bonds and common stocks. Generally, due to their bond characteristics, they provide some downside protection, while having the upside potential of common stock due to the convertibility feature. The downside protection will generally be more pronounced when the security has an investment grade rating, with less protection for convertible bonds rated as junk during periods where junk bonds without conversion features are declining in tandem with stocks (though not as much).

I will use the market action last Thursday, when the S & P 500 fell 2.2%. On that same day, iShares iBoxx $ Investment Grade Bond ETF (LQD) rose 18 cents, or .15%, to close at $116.95, hardly exciting but better than the 2.2% decline in the SPDR S&P 500 ETF. A convertible securities ETF, CWB, declined 38 cents or 1% to close at $37.15.

In the decade ending July 2010, the S & P 500 lost a cumulative 7.37%, while the Bank of America/Merrill Lynch All Convertible Index rose 32.64%. Convertibles As noted in the foregoing linked article published in Financial Advisor Magazine, convertible securities had a rough 2008 and rebounded sharply in 2009, showing unusual volatility in both years.

According to note 7 of the Annual Report at pages 35-36, the leverage consists of auction market preferred shares that current have a low interest rate. Brokers placed their clients in this kind of security, and now those clients find their investments illiquid when the auctions started to fail. Auction rate security The fund shareholders benefit, since these securities are a low cost way for the fund to borrow money. The annualized dividend rates on theses auction preferred shares averaged between 1.41% to a high of 1.52% for the F/Y ending 10/31/2011. Fitch recently reaffirmed its AAA rating of those auction rate securities, TEXT-Fitch.

Monthly dividends are paid at the current rate of $.0939. Capital gain distributions were also made in December 2000, and 2011. AVK - Historical Distributions At the current monthly distribution rate, the dividend yield would be approximately 7.36% at a total cost of $15.3 per share.

SEC Form N-Q: Holdings as of 1/31/12. As of that date, there was a 89.2% weighting in convertible bonds (weighted in junk rated securities) and 6.1% in convertible preferred stocks. The credit quality is lower than the securities owned by CWB:

Due to the juice provided by the low cost leverage, its lower quality bonds, and a market price below its net asset value, AVK will have a significantly higher yield than the convertible ETFs.

I plan to average down by buying another 50 shares if and when the price falls below $14.75.

During an Unstable VIX Pattern, I will chop orders up into pieces and will trade those lots more frequently, compared to a Stable VIX Pattern, when positions would need to be acquired all at once for the most post. The Unstable VIX Pattern will have a considerable amount of whipsaw action in the market, a roller coaster ride, where sell the rips and buy the dips is the guiding trading principal.

The odd lots will be traded, generally speaking, in the same order as their purchase, so that the highest cost lot is sold first hopefully after a pop that generates a profit. With CEFs and other securities that pay good dividends, I am not that interested in the amount of the profit, but in capturing the dividend without losing money on the shares.

In 2011, this fund was trading mostly in a $18-$20 range, AVK Interactive Chart. If you adjust those prices down for the subsequent monthly distributions, the range would be lower, AVK Historical Prices. As with all income CEFs, the goal is simply to capture the dividend without losing anything on the shares. When held in the ROTH IRA, that dividend in effect becomes tax free.

The VIX rose 2.27 or 12.53% yesterday to close at 20.38 The S & P 500 index declined 21.3 or 1.6% to close at 1313.72. The double short ETF for the S & P 500 rose 56 cents or 3.44% to close at $16.84. Left Brain has bought 200 shares of SDS as a palliative for the Old Geezer who is prone to anxiety attacks. It is sort of like sticking a pacifier in the Old Goat's mouth to quiet him down and to achieve some peace and quiet for the LB as it works 24/7 on its myriad trading rules for the Unstable VIX Pattern. LB noted that the OG needs to spend more time working on matters within the purview of his limited competence. Perhaps, more games of checkers are in order. LB grows weary listening to the incessant babble here at HQ. The OG is becoming almost as bad as that Nit Wit RB which just said "go all in Lame Brain".

My main taxable account declined .67% yesterday, viewed as good compared to the S & P 500 decline of 1.6%. I did not check the other accounts, since I know that they would have fallen less than this account which carries most of my at risk assets. The ROTH IRA, which is bond heavy, was probably down less than .2%.

The exchange traded bond and preferred stock segment of the portfolio provided a positive upside (negative correlation) in yesterday's downdraft:

Exchange Traded Bond and Preferred Stock Table as of 6/25/12

I am about to lose more of these securities to redemptions, as explained below.

My general goal every year is to beat the S & P 500's percentage return in the main taxable account with less volatility and a higher yield. The last two conditions have been met every year. The dividend yield of the S & P 500 is currently hovering around 2% which is easy to beat with my esoteric combination of securities. The bond and cash allocation provide the less volatility component. The difficulty has been, and will continue to be, beating the S & P 500's return after meeting the two main conditions of less volatility and more yield. As shown in a chart copied from that account, I have been beating the S & P 500, but that may change. Item # 2 Main Taxable and Regular IRA Accounts Performance Numbers Calculated by Broker (12/13/11 Post).

In his NYT's column, Paul Krugman sees similarities in Austria's banking crisis in 1931, which started a worldwide chain reaction, and the current crisis in Spain. Austria tried to help its banks in 1931, but that put the government's solvency in doubt. According to a history found at the FDIC website, FDR temporarily closed banks on 3/6/33. In 1933, 4,000 U.S. banks failed along with 1,700 S & Ls.

Krugman considers Europe's current response to Spain's banking problems as inadequate, since the EU is loaning rather than giving money to Spain's government. That is a typical argument made by liberals, the solution to virtually any problem is to shower free and borrowed money on those who would like to have it. Spain's problem originated from reckless and improvident real estate loans made by its banks. While moral hazard is certainly an issue, the more fundamental question to ask is why should German and Dutch citizens bail out Spain's banks at no cost to Spain, which is Krugman's solution.

I would note that Germany's debt to GDP ratio is already around 80%. Germany has guarantees of €200 billion supporting the Financial Stability Fund. German and French banks have about €800 exposure to the debt of Europe's peripheral nations. MarketWatch I would question whether Germany is in a position to provide free money to Spain, Italy and Greece.

The WSJ has a graph of government debt as a percentage of GDP for the European nations. Historically, a debt to GDP ratio over 90% starts to create serious problems for a nation. Reinhart and Rogoff - Bloomberg

I noticed that Zions called its high yielding equity preferred stock, ZBPRE, on 6/15/12, which was the first date such call right could be exercised by the bank. That issue had an initial 11% coupon, but would have changed to a 10.22% spread to the two year treasury rate after 6/15/12. Final Prospectus Supplement (3/31/2009) That security was issued when Zions was under some duress and in need of equity capital.

Effective 1/1/12, Tennessee has repealed its gift tax and will phase out the state inheritance tax. Summary During the phase out period, the tax exemption will be raised through 2015 before the tax disappears altogether. The exemption for 2014 is $2 million and $5 million in 2015.

1. MKZ Ends Annual Period Yesterday (own 100 shares): MKZ is a "principal protected" senior unsecured note issued by Citigroup Funding and guaranteed by Citigroup as provided in the prospectus. Pricing Supplement The unsecured senior note matures has a $10 par value and matures on 7/11/2014.

This notes pays the greater of 3% or up to 31% in one annual interest payment. The owner can receive more than 3% depending on the movement of the DJ-UBS commodity index during the annual coupon period, provided that index does not have a close about 131% of its starting value. A close above that 131% causes a reversion to the 3% minimum, and it no longer matters thereafter how much the index gains during the applicable coupon period. I call that event, which causes the reversion to the 3% minimum coupon, a Maximum Level Violation. It is what it is.

The most recent annual period ended yesterday with no gain in the commodity index. The starting value on 6/23/11 was 155.967 and the closing value was far lower at 130.56. Chart The maximum level for the current coupon period is therefore 171.033. (1.31 x 130.56=171.0336). A close above that Maximum Level at anytime on or before 6/24/13 (annual period closing date) will cause a Maximum Level Violation and a reversion to the 3% minimum coupon, irrespective of the percentage gain in the DJ-UBS index at the annual closing date.

Based on my current view of my Citigroup Funding "principal protected" notes, all of which mature in 2014 at $10, I am content with their minimum coupons in the current abnormally low interest rate environment and view the possibility of more as a bonus. My main concern with them is the credit risk associated with Citigroup, and I am not that concerned about its survival until these notes are paid off in full.

A fixed coupon Citigroup note maturing in May 2014, which has a 5.125% coupon, was selling at close to 104 yesterday, giving it a YTM of less than 3%. The buyer of that price has no upside in the coupon and will face a loss at maturity. From my perspective, my buy of 100 MKZ at less than par value, with its 3% minimum coupon and the possibly of more, is clearly superior to that fixed coupon bond selling at above par value.

I currently own $8,000 in principal amount of these Citigroup Funding "principal protected" senior unsecured notes traded on the stock exchange. (200 MBC; 100 MOU; 100 MOL; 200 MTY; 100 MKN and 100 MKZ) The coupons of both MOL and MTY are linked to the price of gold, and neither have hit during my ownership, though MTY did hit in the coupon period prior to my purchase.

The common stock of Telefonica SA is traded in the U.S. under the symbol TEF. As with many European telecoms, the price of TEF shares have plummeted due to the financial crisis and investor perceptions about the pace of the eurozone's recovery. Telefonica is the largest carrier in Spain, and that country is suffering from extraordinarily high unemployment, as well as serious sovereign debt and banking problems.

TER has significant operations in Latin America. Overall, it has operations in 25 countries. About Telefónica It has a 9.7% stake in China Unicom and a 10.5% interest in Telecom Italia. (page 6 telefonicas_profile.pdf)

According to FINRA, this bond is currently rated investment grade. S & P rates it at BBB; Fitch at BBB+ and Moody's at Baa2.

Moody's recently downgraded its rating to Baa2 from Baa1. Reuters.com I reviewed that Moody's report, dated 6/20/12, which is available to TD Ameritrade and Schwab customers. That report noted that TEF is the leading operator in Brazil, Argentina, Chile and Peru, and has substantial operations in Columbia, Ecuador, El Savadore, Guatemala, Mexico, Panama, Uruguay and Venezuela. Altogether, the company had 206.2 million customers in Latin Americas as of 3/31/12.

I then did a Google search to find at the redemption price, since the OG had at best a vague recollection of the premium due.

I then found a BAC press release that gave notice of its intention to redeem every trust preferred which I own, which I had not previously seen.

The 2026 bond will be redeemed at 102.0695% of its $1,000 par value plus $12.417 in accrued interest. This one has a 8.278% coupon. So I will realized close to a $70 gain on this bond plus the interest at the coupon rate since its purchase.

I will also lose to redemption the exchange traded TPs KRBPRE and KRBPRD. Both will be redeemed their $25 par values plus accrued interest. The accrued interest on KRBPRE will be $.39375 per share, and KRBPD has a lower amount of accrued interest at $.135417. KRBPRD will go ex dividend for its regular monthly interest payment later this month which explains the lower amount. MBNA Capital D 8.125% TruPs, KRB.PD

As I have said, I ran out of good options to redeploy the proceeds from redemptions about two years ago. I am now faced with a series of less bad options. I bought yesterday one of those less bad options in the ROTH IRA to replace KRBPRE with a TC that had previously been sold. I hope to discuss that security in Thursday's post.

Monday, June 25, 2012

I thought the video interview with Steve Romick, the manager of FPA Crescent (FPACX), was well worth the time viewing. Romick is both knowledgeable and intelligent.

Jeremy Grantham called bond yields "disgusting". Amen to that comment.

The large American financial institutions dismissed Moody's ratings downgrades, basically arguing that Moody's is not competent to analyze their businesses. That argument will resonate, since investors remember Moody's rating toxic trash as AAA. To many, it appears that the rating agencies have compensated for those frequently idiotic past mistakes by lowering ratings below where facts would otherwise justify now. But, who would expect the large banks to agree with a debt downgrade and who really knows what is lurking in their hugely complex businesses? Did Dimon really understand what was happening in London, for example, before the damage was already done?

The "pro-bailout", newly formed Greek government has asked the EU to undo many of the austerity measures and has basically requested more money to spend. ReutersNYT The Greeks are not serious about trimming their bloated public sector, but are interested in receiving as much money from the Germans as possible before defaulting again on their debt.

I own 100 shares of another TC with the same underlying AON junior bond, KTN, which goes ex interest later this month. Structured Products Corp. 8.205% Credit-Enhanced CorTS (KTN) My average cost on that one is less than $14. KTN is unusual among TCs in that there is no call warrant attached to it. The absence of that warrant allows the price to appreciate to reflect a market price for the underlying bond. The underlying bond 2027 is trading well above its par value.

I do not have a position in CLARCOR, a company headquartered in Franklin, TN, a few miles from HQ which is located in the SUV Capital of the World. (both Brentwood and Franklin have AAA credit ratings) Along with many other companies, such as MMM, I will monitor Clarcor's earnings, as one of many indicators of the U.S. economy's health. After the close last Wednesday, CLARCOR reported that its second quarter net income was 65 cents, up just 2% from the year ago quarter, and five cents below the consensus forecast of 70 cents. The company reduced guidance for 2012 to $2.5-$2.65 from $2.55-$2.7. Clarcor fell 4.47% in trading yesterday.

I discussed briefly in the last post the importance of understanding correlations among asset classes. While I have not checked the numbers, there is a post that shows in graph form the correlations among different types of ETFs on a rolling basis. Assetcorrelation The same author has a bond Assetcorrelation graph.

Mornginstar also has a Correlation Matrix for the 14 Asset Classes. For large cap U.S. stocks, an asset class with a low positive correlation would be investment grade bonds and non-U.S. bonds would have even a lower correlation at 005.

Felix Salmon wrote an article published at Reuters about how correlations have changed over time.

I recently bought 1 Telecom Italia Capital bond. For those willing to accept the risk, there are senior bonds issued by European telecommunication companies, which are rated investment grade, that provide greater yields than similarly rated corporates issued by U.S. companies. Hopefully, I will have time to discuss in tomorrow's post last Friday's purchase of a Telefonica Emisiones senior bond maturing in 2019, trading at a YTM of around 7.62%. Senior bonds from that issuer, a wholly owned subsidiary of Telefonica (TEF) who guarantees the note, are rated Baa2 by Moody's.

1. Sold 101.9534 Shares of the CEF JTD at $13.35 Last Wednesday (see Disclaimer): These shares were bought in my Sharebuilder brokerage account, one of my satellite brokerage accounts. That particular account was opened after I refused to roll over CDs purchased through the affiliated bank, ING Direct, one of the earliest banks operating solely online. I had used a savings account at ING Direct to buy certificates of deposit before the onset of the Federal Reserve's Jihad Against the Saving Class. As those CDs came due, I rolled them into a ING Direct savings account. I then opened an online brokerage account at the affiliated brokerage, linked it to the savings account, and started to deploy some of the proceeds into dividend paying securities. The primary goal for those funds is income generation, with capital preservation being a another goal. After collecting a good dividend yield, I am prone to sell the security at virtually any profit, just to protect the capital.

Hopefully, in a few years, I can go back to buying CDs with all of the funds at this financial institution. I do not intend on doing that until I can receive at least 4% on a six month CD. That is not going to happen anytime soon, or even before 2015.

By "satellite brokerage account", I am just referring to a brokerage account, opened after the Fed started its Jihad against the Saving Account, that will likely be used to purchase income securities, which will vary in value, but will revert to their original purpose once short term rates start to rise again to 4% or so. Those purposes include the purchase of three and six month treasury bills directly at auction, the purchase of bank certificates of deposit; and the holding of excess cash in money market funds and savings accounts with an occasional purchase of a Vanguard mutual fund with cash flow (mostly bond funds with short durations).

So far in 2012, I have realized short term capital gains in the Sharebuilder account of $267.23 and $153.65 in long term capital gains. The 2011 total realized gains were $1,136.97 ST and $450.89 LT. The total for 2009 was $967.87.

I purchased 100 JTD shares on 2/28/11, and subsequently reinvested only the first quarterly dividend paid 4/1/11. The remaining dividends were paid in cash. Overall, I will receive 6 quarterly distributions of 26 cents per share including the one to be paid on 7/2/12 that went ex dividend 6/13. JTD Distributions That would be $158.24 in dividends netted against a $15.82 loss on the shares, giving me a total return of $142.42 on a total investment of $1,351 (with one reinvested dividend) or 10.54% in less than 16 months. That is viewed as a victory for this account, compared to the alternative.

2. BOUGHT 300 Capstone Turbine (CPST) at $.9852 Last Friday(Lottery Ticket Basket Strategy)(see Disclaimer): I was able to buy 300 CPST shares as a Lottery Ticket since the cost, excluding the brokerage commission, was less than $300. LT buys have to be less than $300 plus any prior net trading profits. Since this was my first purchase of CPST shares, I could not buy more than 300 shares.

I would add the following caveat to this purchase. CPST has never had a profitable year and it may never be profitable. The current consensus forecast does call for a 4 cent per share profit in the F/Y ending in March 2014. CPST Analyst Estimates Maybe that will happen, and I would hope so.

For its F/Y ending 3/2012, Capstone had a net loss per share of 7 cents on revenues of $109.371 million, compared to a loss of 16 cents per share on revenues of $81.89 million in the preceding fiscal year. 10-k at p. 33 Over the past two fiscal years, CPST has reported positive net income in only two out of eight quarters, but neither of the quarters with net income was sufficient to generate a penny in net income per share. (p.46) The company used $21.4 million in cash in its operating activities for the 2012 F/Y. (page 46) As of 3/31/12, the company had $49.952 million in cash (page F-3). However, some of that cash was raised in March with the sell of 22.6 million shares and warrants with an initial exercise price of $1.55 per share, at $1.1 per unit. (page 47). Given the cash burn, it would not be surprising to see more dilutive cash raises.

Capstone develops, manufactures, markets and services micro turbines for the production of electricity. This is a link to the company's brochure that describes its products in greater detail. CPST's micro turbines are available in various sizes from 30kW to 1MW configurations and will run on a variety of fuels including natural gas, biogas, flare gas, diesel, and propane. Capstone Turbine Corporation | Products

For the 2012 fiscal year, the company sold 627 microturbine units (96.1MW), up from 611 units (69.7MW) in the previous fiscal year. (page 41)

I have had CPST on my Lottery Ticket monitor list for over 2 years. I just held off buying shares until the price fell below $1.

For anyone interested in this company, I would recommend reading all of the foregoing press releases and to review the recent SEC filings.

I would make just a few observations. These turbines are popular with firms that need to conduct operations in remote locations, particularly energy firms producing natural gas at those locations. The energy firms can use unprocessed natural gas at the production site to power the gas turbines. One problem with that market now is that several domestic firms have cut back production in response to low natural prices.

One advantage of the CPST turbines is discussed in the press release, referenced above, that involves purchases by the Russian oil company LUKOIL. The CPST turbine can burn untreated "associated gas" that would normally be flared at the production site. Other turbines require treatment equipment to remove sulfides:

Other potential users would include other types of companies operating in emerging market countries that are energy producers, either in remote areas or in places where the electric supply is not exactly reliable.

Hospitals would be another market, where an energy source may be needed whenever there is a loss of power.

There would be other industrial type uses (e.g. data centers, utilities, supermarkets and manufacturing). I believe that these industrial uses need to become more prominent, particularly given the low cost of natural gas, before CPST can turn profitable.

Capstone Turbine rose 4 cents, or 4.49%, in trading last Friday to close at $1.01 on more than double its average three month of 3 million shares.

Friday, June 22, 2012

Moody's downgraded 15 large financial institutions after the close yesterday. While the downgrades were expected, the announcement may add to the general angst among investors so prevalent now.

Credit Suisse was cut three notches, the largest downgrade. Morgan Stanley's unsecured senior debt was hit with a two notch to Baa1 from A with a negative outlook. According to the WSJ, ratings for senior unsecured debt were also reduced two notches for Goldman Sachs (now at A3), J P Morgan (now at A2 from Aa3); and Citigroup (now at Baa2), all with negative outlooks. Bank of America was reduced by one notch (now Baa2), with a negative outlook. (see also: MarketWatch) While the Royal Bank of Canada was taken down two notches, its new debt rating is Aa3.

The foregoing downgrades apply to senior unsecured debt. Securities, which are more junior in priority than unsecured senior debt, would also suffer downgrades. For example, BAC's trust preferred securities were rated at Ba1 by Moody's, as noted in item # 2 Bought Back 50 KRBPRE at $25.06-ROTH IRA (5/22/12). I checked the Bank of America website last night and noted a Ba2 rating for the TPs, which would be a one notch downgrade. (see chart at Bond credit rating to compare ratings)

While the common share for the U.S. downgraded banks rose some in after hours trading last night, I doubt that will last.

Xinyuan Real Estate (own as LT) announced that it had completed its $10M share repurchase program announced 5/26/11 by buying 4.5M ADRs. The Board announced a new $20M repurchase program. XIN rose 10 cents in trading yesterday to close at $2.78.

The Philly Fed manufacturing index fell to a -16.6 in June from -5.8 in May. Readings below zero in the regional federal reserve manufacturing indexes indicate contraction. The new orders index fell to a negative 18.8. philadelphiafed.org.pdf

MarkitEconomics flash June manufacturing PMI for the Eurozone hit a 36 month low at 44.8. Any number below 50 indicates contraction.

Spain sold notes maturing in April 2014 to yield 4.71%, compared to 2.07% in the prior auction of the same maturity paper.

There seems to be a constant stream of negative news. LB sees no rational reason to be bullish about stocks over the short term. Over the long term, meaning 10 years or so, stocks should provide better returns than bonds purchased at today's low yields.

I bought 100 shares of a double short stock ETF, SDS, earlier this week before the Fed meeting. I will generally hold double short ETFs over a brief period of time, since those securities are viewed as dangerous here at HQ and may start to lose their tracking one day after purchase. After doing some self psychoanalysis, their main purpose may be to relieve the Old Geezer's anxiety. SDS was bought in the Vanguard satellite brokerage account and is sufficient to hedge all of the limited number of common stock positions held in that account. ProShares UltraShort S&P500 (SDS) rose 73 cents, or 4.61%, in trading yesterday to close at $16.56.

Interestingly, Goldman Sachs came out yesterday with a recommendation to short the S & P 500 as a short term trade. WSJBloomberg

An article in Forbes, published 6/21/12, noted a large inflow into the double short stock ETF SDS.

Given the carnage from yesterday, I was satisfied with the performance of my portfolio. In the main taxable account, I counted 51 securities that finished in positive territory. While that account still had over 200 in the negative column, the overall performance was much better than the 2.2% decline in the S & P 500. That account fell 1.19% in value yesterday. I place a premium on going down less on very bad days. Of course, the securities that were up in value did not increase much. Their overall impact was positive since capital was devoted to them, sometimes in significant amounts (e.g. the bond CEF ERC and iShares 1-5 Year Laddered Corporate Bond Index Fund), and they did not decline. Other large positions saw small declines, such as a 500 share position in iShares 1-5 Year Laddered Government Bond Index Fund, CLF Fund Quote - (TOR) CLF, which fell one cent per share. I would estimate that around 90% or so of the stocks positions declined in value which is not surprising when stocks are mauled as a asset class.

Back in October 2008, I remember a day when the DJIA fell over 600 points. I looked at that same account, and there was just one green arrow out of over 200 securities. As I recall, all of my investment grade corporate bonds fell in price that day, including the ones rated A or even higher. In response to that kind of debacle, and the overall decline in most asset classes during the Near Depression, I started to devote more time to identifying and purchasing securities that would be negatively correlated with stocks and/ or have low positive correlations, particularly in times of market stress and volatility. That effort requires a big picture analysis to determine the reasons for asset correlations and why those correlations may change over time. Instability & Volatility in Asset Correlations (May 2009 Post)

Since I am busy on another matter, I will discuss only one trade in this post. When discussing just one trade, I will go into greater detail.

1. Bought 100 PBNY at $7.391 Last Wednesday (Regional Bank Basket Strategy)(see Disclaimer): PBNY is the symbol for Provident New York Bancorp, a relatively small thrift operating in the Hudson Valley region of New York state. I have had the bank on my regional bank monitor list for a couple of years. I decided to purchase some shares after its recent decline and a favorable first quarter report. On the day of my purchase, the shares declined 30 cents or 3.9% to close at $7.40. Earlier this year, the shares were trading at over $9. Provident New York Bancorp

I am not personally familiar with the bank's geographic service area. I did review the area using the Google Map, and the area would generally be referred to as part of the greater NYC marketplace. The communities served by PBNY are north of NYC. In January, PBNY announced that it would acquire Gotham Bank of New York which would represent an extension of PBNY footprint into the greater NYC marketplace when completed. (Form 10-Q at page 42; and Press Release dated January 18, 2012). Gotham operates one branch in midtown Manhattan and had $169M in loans and $335M in deposits as of 9/30/11. The bank hopes to close this acquisition late this year.

As of 3/31/12, the bank had 36 service locations. The bank operates primarily in Rockland (13 offices) and Orange County (14 offices). Eight office are in the continuous counties of Sullivan, Ulster, Westchester and Putnam. Two offices are in Bergen County, NJ. (Form 10-K at page 1)

For the 2012 first quarter, PBNY reported net income of 15 cents per share up from 10 cents in the year earlier quarter. SEC Filed Press Release

As of the Q/E 3/31/2012, the net interest margin 3.57%; NPLs were 2.89% of total loans; NPAs were 1.8% of total assets; the allowance for loan losses as a percentage of NPLs was only 53% (prefer to see over 100% when making an initial investment); tangible book value per share was $7.25, slightly below my purchase price; the efficiency ratio was okay at 67.86% (prefer lower than 60%); and the return on average assets was .73%, much prefer over 1%.

The capital ratios are good:

PBNY Capital Ratios as of 3/31/12

The bank did not participate in TARP, always viewed positively. {Form 10-K at page 32}

So, overall, this bank has some positive and negative characteristics. I generally have a favorable view of its service area. It would seem ripe for a takeover by a bank wishing to expand into this market.

A five year chart reveals a stock that held up well during the initial stage of the Near Depression. PBNY Interactive Chart Until 2009, the stock was trading in a channel mostly between $10 and $12 during 2007 and 2008. Between 2/2009 through June 2011, the stock entered into a lower channel between $8 to $10. Thereafter, an even lower channel was formed, mostly between $6 to $8. The stock last traded over $10 in March 2011. I would consider selling at between $9-$10.

The bank is paying a quarterly dividend of 6 cents per share, which works out to a dividend yield of about 3.25% at a total cost of $7.39. With a modest capital gain potential, absent an acquisition, a $9 price net realized price in two years would produce a total annualize return near 13.5% ($1.50 per share profit=20% or 10% per year, plus the 3.25% dividend)

PBNY has maintained the 24 cent per share annual dividend rate since 2007. The rate in 2007 was 20 cents. I would prefer to see dividend raises during the Near Depression period, but an unwillingness to cut the dividend is acceptable here at HQ given the circumstances.

The bank actually increased income in fiscal years 2008 and 2009.

Net Income F/Y Ending 9/30:

2007: $19.627M

2008: $23.778M

2009: $25.861M

The net income then started to decline, falling in F/Y 2010 ($20.492M) and again in F/Y 2011 ($11.739M). Those declines account for the weak share price discussed above. Those declines appear to be largely associated with an acceleration of NPLs (page 44: F/Y 2011 Form 10-K)

For the F/Y ending 9/30/11 PBNY reported only 31 cents in net income, down from 54 cents in F/Y 2010 and 67 cents in F/Y 2011. The current fiscal year has two more quarters left and the consensus estimate is for 57 cents, PBNY Analyst Estimates The F/Y ending in September 2013 has a consensus estimate of 62 cents. I would anticipate that the company will need to earn at least that much in F/Y 2013 to propel the stock over $9 per share by the end of 2013, with no earnings warnings for future periods.

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About Me

I am no longer in a capital accumulation phase. My key investment objectives are capital preservation and income generation.
I started to buy stocks in the late 1960s.
I have a balanced worldwide portfolio with a considerable allocation to cash. Starting in December 2016, I started to reallocate out of cash and into high quality short and intermediate term bonds and FDIC insured CDs using a ladder strategy.
I have been paring my stock allocation, selling gradually into the robust stock market rally occurring since the U.S. election.
In this blog, I will be discussing only a sample of my recent stock trades. I will be discussing almost all of my bond and CD trades.

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Disclaimer

I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this blog, I am acting solely as a financial journalist focusing on my own investments. The information contained in this blog is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this blog is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. For purchases of bonds and preferred stocks, the prospectuses need to be reviewed until fully understood by the investor.